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Tue, Jun 13, 2000
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U.S. Economy Set to Hit Record for Longest
Expansion in History

   Fox Market Wire
If it feels as if the U.S. economy has been on roll for a long time, it has. As of Tuesday, a new milestone will be reached — the longest expansion in history.

Since the expansion began in March 1991, millions of jobs have been created, Americans' personal wealth has soared and new technologies, especially the Internet, have begun to change how business is done in near-revolutionary ways.

On Feb. 1, just a month shy of nine straight years of growth, the current expansion will surpass the Vietnam War-fueled 1960s when the economy grew for 106 months from 1961 through December 1969 before lapsing into recession.

Remarkably, analysts see scant signs the current boom is faltering. To the contrary, Federal Reserve policymakers worried about the economy's vigor are preparing to raise interest rates at their Feb. 1-2 policy-setting meeting in an attempt to slow it for its own good.

The Commerce Department confirmed on Friday that growth in gross domestic product continued at a booming 5.8 percent annual rate as 1999 ended.

Last year, GDP expanded 4 percent to mark a third straight year of expansion at that rate or higher, following increases of 4.3 percent in 1998 and 4.5 percent in 1997.

Consumer optimism is sky-high and unemployment is at a three-decade low of 4.1 percent. Consumer prices, a proxy for inflation, advanced a relatively modest 2.7 percent last year, and excluding food and energy were at mid-1960s levels of 1.9 percent.

Growth Brings its Own Threat

The key threat the economy faces, of another recession, potentially comes from its own prosperity if wages and prices get out of control at home or if a global boom sets off a chain of rising prices for commodities like oil, analysts say.

But the risks so far seem contained.

"I can't see the end of this expansion," said Allen Sinai, chief economist for Primark Decision Economics Inc. in Boston. "The kinds of factors that normally set the time-clock ticking to end an expansion still can't be seen, though I concede there is more 'noise' around the edges now."

The United States has not seen recession — back-to-back quarters in which national output of goods and services shrinks — since a nine-month interlude from June 1990 to March 1991. The current expansion dates from the same month as the recession ended under a convention established by the National Bureau of Economic Research that dates U.S. business cycles.

A lot changes in three decades, including the primary forces that are behind the powerful economic expansion.

"Information technology has played a far greater role than any of us had foreseen," said economist Sung Won Sohn of Wells Fargo Bank in Minneapolis. "It is really almost like electricity was in that it has set loose a tremendous surge in productivity gains that are the linchpin of our economic growth."

Computers Play Key Role

The 1960s were the beginning of the computer age, with bulky mainframe computers put into service to handle routine work, but the 1990s brought computer use to the factory floor and into every facet of life.

Even veteran captains of industry, like General Electric Co.'s Jack Welch, celebrate the company's electronic commerce ventures and its use of the Internet as a business tool to not only sustain but supplement its old-line operations.

"There is a striking contrast in the way businesses and management operate," Sinai says. In the 1960s, cost-cutting through job reductions and productivity increases normally were a response to pressures on profits.

"But the current expansion is unlike any other in that business managers keep looking for more productive ways to do things and for better products as a way to deal with competition," Sinai said. That has fattened profits, which have been turned back into productive investment.

"We have a domestic-led expansion, higher spending on productivity, the emergence of budget surpluses ... and a financial system that is by and large in good shape and we are the leaders of the world in much of the new technology," Sinai said. So "the prosperity is well-based."

Risks to Economy

But still there are banana peels that could trip the expansion up.

Federal Reserve Chairman Alan Greenspan, headed handily toward congressional confirmation of another four-year term as head of the U.S. central bank, sees a shortage of workers and robust consumer demand, including for loans to buy high-priced stocks, as troublesome.

Private-sector economists see that and other weaknesses.

"The Achilles' heel is that Americans are becoming so heavily indebted — both consumers and corporations — that they are, in a bigger sense, running the country's current-account deficit to records that place us at risk of being unable to continue to attract foreigners' investments," Sohn said.

Economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pa., similarly notes U.S. prosperity has fanned demand that is drawing in record imports and making the United States potentially vulnerable as trade and capital imbalances mount.

So in the end, what will bring the current expansion to a close will be "too much of a good thing," he said. "I'm an optimist, though, and I have an optimistic outlook for 2000.

"Looking ahead to 2001, though, I'm getting antsy about the prospect that the Fed will have to start aggressively tightening (raising interest rates) by mid-year, bringing this expansion under severe pressure," Naroff said.

— Reuters contributed to this report

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